President Obama to order help for student loan debtors
By: Nirvi Shah June 8, 2014 07:04 AM EDT

The president will issue an executive order Monday in the name of easing student borrowers’ debt loads by capping repayments at 10 percent of their monthly income, the White House confirmed to POLITICO.

President Barack Obama said in his weekly address Saturday that he would take action on student loan issues in the coming days, but gave no details. The executive order, first reported by the New York Times, will expand on a 2010 law that capped borrowers’ repayment but left a hole in eligibility for people with older loans. Those left out of that relief include people who borrowed before October 2007 or stopped borrowing by October 2011.

“This makes it simpler to have one set of terms,” said Jason Delisle, director of the New America Foundation’s Federal Education Budget Project. But he pointed out that all borrowers already have the option of basing loan repayments on their income.

Federal student loan debt reached more than $1 trillion last year, an amount that has some economists concerned is creating a chilling effect on spending, home-buying and other economic drivers.

“This is commencement season, a time for graduates and their families to celebrate one of the greatest achievements of a young person’s life,” Obama said Saturday. “But for many graduates, it also means feeling trapped by a whole lot of student loan debt.”

The economic reasoning behind the maneuver is questionable, however, Delisle said. The president is making the case that “we need to help [student loan debtors] with debt so they can go into even more debt,” such as taking out a mortgage to buy a home. But student loans already helped these borrowers consume beyond their means, he said.

The executive order will be part of a White House event on student loans planned for Monday. The White House said the change will allow an additional 5 million borrowers with federal student loans to cap their monthly payments at just 10 percent of their income.

Obama’s executive order wouldn’t kick in until December 2015, however, the White House said, to give the Education Department time to propose and enact new regulations.

The Education Department also will renegotiate contracts with federal loan servicers so that they have incentive to keep borrowers from falling behind on payments or defaulting on their loans.

The proportion of borrowers defaulting on their federal student loans within three years of beginning to repay them has been rising for several years running: From fiscal year 2009 to 2010 it rose from 13.4 percent to nearly 15 percent.

The Congressional Budget Office has estimated that capping payments for borrowers at 10 percent will cost the U.S. between about $10 billion and $12 billion. Some of the cost could be offset: For example, some borrowers’ eligibility for having what’s left of their loans forgiven entirely could be delayed by several years. The president has proposed changes like these in his budget several times, Delisle said, but those offsets require action by Congress.

The Education and Treasury Departments are working with the big tax prep firms H&R Block and Intuit (maker of TurboTax) on an effort to ensure borrowers are aware of repayment options and tax credits for college tuition, the White House said.

A bill that has Obama’s support from Massachusetts Sen. Elizabeth Warren is expected on the Senate floor Wednesday, after a series of hearings on student loans, including two last week, as well as a press conference labeling loan debt a “double whammy” for women because of the wage gap.

Warren’s proposal would allow existing borrowers to refinance student loans at lower interest rates put into place for new borrowers last year. It has 39 Democratic co-sponsors.

The measure is unlikely to pass the Senate, however, and even if it does, it likely would not clear the GOP-led House because of the way it would be financed. Borrowers’ refinancing would be paid for via the so-called “Buffet rule” that would raise taxes on the wealthy.

“This bill doesn’t make college more affordable, reduce the amount of money students will have to borrow or do anything about the lack of jobs grads face in the Obama economy,” Senate Minority Leader Mitch McConnell said in a statement to POLITICO.

Sen. Lamar Alexander of Tennessee, ranking member on the Senate education committee, noted the departure from last summer, when Democrats and Republicans came together to keep interest rates on new loans from doubling.

“Hopefully he will work that way again instead of joining Senate Democrats’ political stunt to give some former students a $1-a-day subsidy to help pay off loans while raising income taxes by $72 billion and increasing the federal debt by up to $420 billion,” he said in a statement.

Delisle, of the New America Foundation, said Obama’s plan is preferable to Warren’s. Refinancing students’ debt would have no effect on their monthly payments, though it could shorten the duration of their payments in the long run. But he questioned the wisdom of helping those who already have attended college instead of finding a way to invest in students who are trying to obtain a degree in the first place.

In addition to the White House event planned for Monday, Obama is scheduled to answer questions about student loans on the microblogging site Tumblr on Tuesday.